There has rarely been an implosion on Wall Street so sudden and of such magnitude as that of Enron, the biggest energy-trading company in the United States. The disintegration of the Houston-based giant, ranked seventh in the Fortune 500 last year, is so far-reaching that it could have a ripple effect on the US economy.
It raises concerns about over-exposed American banks and threatens to disrupt the delivery of oil and gas to energy markets, something that could make the recession deeper.
Analysts say the damage can be contained without a fully-fledged crisis in the credit markets or global panic as occurred when another high-flying financial dealer, Long Term Capital Management, collapsed in 1998. It has, however, affected the stock markets and the energy business, turned stockholdings to dust for investors and mutual funds, and it will undermine the Republican case for greater deregulation of financial companies.
Enron had aggressively lobbied Washington to curtail regulation and disclosure, and the company's chairman and CEO, Mr Kenneth Lay, who heavily bankrolled George W Bush's election campaigns, had the ear of Vice-President Dick Cheney when formulating an energy plan that emphasised deregulation and new drilling rights.
Enron was cast as the villain by a blackout-plagued California earlier this year when the state was left with billions of dollars in debt as its power companies were pushed towards bankruptcy.
The fall of the champion of free markets also underlines the perils for investors of placing their trust in financial companies that report massive profits but generate little cash.
During the 1990s, Mr Lay expanded Enron's core business from power distribution to buying and selling energy and other commodities. Gas and oil contracts were often traded several times over.
By the late 1990s the Houston company had transformed itself into the main trading place for electricity and gas supply contracts in the US, and its EnronOnline trading system had become a bigger cash cow than its world-wide network of utilities and pipelines. Its revolutionary expansion involved heavy borrowing, some of which was hidden in private partnerships from which the top executives enriched themselves.
Enron's breath-taking collapse began last month when it disclosed that it had lost $1.2 billion (€1.35 billion) of its market value as a result of these debt-laden partnerships, and a searchlight was turned on its complex inner workings. It then confessed that it had over-stated profits over five years by $600 million, and a week ago executives disclosed that its cash reserves were down to $1.6 billion, a billion less than supposed. It was quite clearly over-leveraged. Other trading firms took their business elsewhere to avoid exposure and Enron's cashflow dried up.
A smaller Houston rival, Dynegy, made a $9 billion all-stock bid for the company - which had been worth $70 billion last year - but it had second thoughts when more financial problems emerged and credit-rating agencies downgraded Enron's debt to junk status on Wednesday. Enron's stock, which traded at $90 in August, plummeted to 61 cents that day and by yesterday was practically worthless. This amounts to a financial disaster for the 21,000 Enron employees whose pension funds depended on Enron stock, which they could not sell as it tumbled in value.
Many reasons are being suggested for the failure of analysts to see the approach of one of the biggest bankruptcies in American history.
As a darling of Wall Street, Enron's lack of transparancy was allowed to go without much question. Now investors are punishing the two big banks, Citigroup and JP Morgan, which invested millions in the doomed Dynegy takeover.
The impact will be widespread but limited among creditors. Much of the $13 billion debt has been syndicated among dozens of financial institutions.
As for the energy markets, a combination of an extremely mild autumn and the recession has left gas and oil companies with sufficient reserves, for now, to cope with any short-term disruption as other traders pick up Enron's business.
